If business and life were only so easy that we’d never need to borrow money, we wouldn’t need articles like this one from my friends over at Business on Main:
5 Steps to Bounce Back From Bad Credit and Bankruptcy
While the tips are simple, the impact can be great and can help keep your business rolling along.
YOUR TURN: Have you had financial trouble that’s held you back, but found a way out? If so, I’d love to hear your tips. To make it worth your while, I’m giving away a $50 Amazon gift card to 1 lucky contributor. I’ll draw the winner at random on the 30th of September at 5 PM central time and share the winner, along with the winner of the How to Give a Winning Presentation on October 10th, 2011. I’ll also announce the winners of the 6 biggest downsizing mistakes contest from August.
Disclaimer: My blog is a part of an online influencer network for Business on Main. I receive incentives to share my views on a monthly basis.
Photo credit to: http://www.flickr.com/photos/danmoyle/5634567317/in/photostream/
Phil, thank you for the opportunity to share my story and some tips here. This is one of those uncomfortable truths or taboo topics I love to discusss because, let’s face it: we don’t learn this stuff in school.
Back around 2000, I had a family member steal my identity and ruin my otherwise awesome credit. I mean, my credit was so good that I had an AmEx Blue Optima (corporate) credit card for my then part-time consulting business (I moonlighted as an IT consultant while working full-time in tech support and doing some training and education work).
When that happens, there’s not much the credit bureaus can do. You have to take legal action via local enforcement, the FTC, and jump through all sorts of hoops. It becomes a time trap so, then, you’re losing time AND money. Yikes.
Fortunately, while I was depressed for a while, I started to see it as an opportunity. I became a sort of consumer advocate and I did more research about credit. What’s encouraging is that it’s better to have bad credit than no credit at all, especially since, in today’s economy, it’s hard to start building up credit from scratch. Generally, college students are fortunate there because they throw offers your way assuming you’ll find a job easily as you intern and earn your degree (not always the case, as we know).
So, let’s talk about how I’ve fixed my credit (and continue to do so) but first some lessons…
1. Some folks say that having your credit report ran several times looks bad. It doesn’t so long as you are doing related stuff. For example, if you’re looking to buy a car, all the related activities there are bundled together so you’re not getting dinged every time you have credit stuff going on.
2. After getting burned by the archaic, broken credit system, you may want to just do things on a cash-only basis. Bad move. Credit matters for more than getting loans and credit cards. Employers are looking at credit scores and even some discerning clients are doing the same. The assumption is that, if your credit score is good, you are a responsible individual.
3. Utilities and other recurring bills may report to the credit bureaus but do not necessarily build up credit. Usually, your best bet is to lease things (think Rent-A-Center or Aaron’s0. You may pay WAY more in the long run but the rolling balance is what builds up credit, above all.
4. On the flip side, if you are late with a payment for those non-credit-building bills, they will report you as soon as 60 days but the worst credit penalties (or dings as I prefer to say) happen when you let those high balances carry over after 90 days – don’t do it!
5. At some point, everyone that falls into a financial rut ends up sacrificing certain bills. Again, don’t do it. Talk to the creditors and share your special circumstances. If you don’t have money, they can defer the balances. If you have some money to work with, you can at least make good-faith payments. Set up some installment plans to keep those balances from affecting your credit scores.
6. College loans. Ah, yes… These really get you. College has always been expensive and it only gets worse in that regards. I had a scholarship and I was still getting loans to keep up with the hidden costs. Defaulting on a loan can be rough so here are some tips for the college (and soon-to-be college) students…
- Before you go pick a school, check their default rates. That’s a good indicator of how much that degree is really worth and what the local job market looks like. If there’s a high default rate, consider other options.
- Stick to subsidized loans if at all possible. Explore other loans beyond Stafford and Perkins. There are many smaller lenders that can help you here. Subsidized loans do not grow with interests as long as you remain enrolled (matriculated) in school full-time.
- Staying in school can be a great tax shelter of sorts.. but it won’t last forever. Start saving money now. I know, partying is fun but, believe me, rainy days (and better investments) will come!
- Avoid defaulting on your loans. Make smaller payments if you must but don’t just NOT pay. There are programs like IBR which help you secure hardship status, set up payment plans, and defer balances until you’re in a better financial position.. but most of these won’t allow you to proceed if you defaulted.
7. Avoid any agency that offers credit repair for a fee. You can do most, if not all, of what they can do on your own. The same goes for lawyers. It may be tempting to take shortcuts
8. Check your credit report regularly. You are entitled to a free credit report once a year (freecreditreport.com or annualcreditreport.com are both good and often provide free online reports that can be downloaded or printed out). You also are entitled to a free report when you denied a job based on credit or, well, denied credit. These things have to be disclosed to satisfy legal requirements for business entities.
9. Be proactive. Sign up for a service like Identity Shield from Pre-Paid Legal Services or a credit monitoring service from one of the three major credit bureaus (I know TransUnion offers this). These services can help you identify problems before they really snowball. It can also show you if your efforts are building up your credit or not.
10. Look for discrepancies in your credit reports. Any unfamiliar residential addresses or balances are something you should flag and dispute ASAP. I know the stress caused by these types of scenarios may cause people to give up but don’t – you’ll only dig yourself in deeper and stress yourself out!
11. If you suspect your information has been compromised, consider freezing your accounts with Equifax, TransUnion, and Experian so that any requests for credit transactions result in a phone call and/or the need for a special authorization code from you. This will help more with new transactions but won’t do much for existing creditors and accounts.
12. Only consider bankruptcy as a last resort. The laws have changed and you still have to pay back most debts. That’s also a hole that you have to dig yourself out of for 7 years.. and you can’t really reverse the process once you commit to it.
Here’s what I’ve done in my own life. I rented stuff that I did not really need to buy to spread out the payments, save more each month, and build up credit. Again, you end up paying more long-term but it makes things more manageable.
I also looked into secured credit cards and I’m glad I did because bank cards don’t do much for you in terms of credit. Secured credit cards are a great way to build credit back up. You often deposit around $200 and get credit limits of up to $3,000. If you’re smart, you’ll find APR (interest rates) that are lower than traditional unsecured cards (anywhere between 7-15%).
Pre-paid cards may seem like a good option but, again, they don’t do much for credit building. The same goes for flexible spending accounts. They’re a good way to keep you from having money handy and possibly spending it but the hidden fees can be a raw deal for most with little benefit in return.
I had a great experience with the credit monitoring and alerting services offered by Pre-Paid Legal and TransUnion alike so I can honestly recommend those. Consider the cost of paying back debts that are not even yours. It’s definitely a smart investment!
I’ve avoided department/retail store cards. They mis-handle their paperwork and often have insanely exorbitant fees, poor customer service, and little benefit. Of course, if you find a store that does it mostly electronically and offers two to three years interest-free, it may be worthwhile but should not be your main credit endeavor.
Quite often, I’ve gone the rent-to-own route even when I had the money to pay up front. This allowed me to reinvest in business ventures, save money, and take care of more pressing matters like fixing your car. We often neglect our cars and then the problems become bigger. I think we’ve all learned that the hard way.
The beauty of rent-to-own is that you’re often looking at payments as little as $50 a month, depending on what you’re getting.. The contract often includes free servicing and replacement, which is also worth it. I had a big-screen TV replaced once like this so it literally paid for itself, in spite of the almost 200% mark-up (compared to, say, 20-33% mark-up for electronics in a retail store like Best Buy). YIKES!
It’s very important to have friends to confide in and have as accountability partners. People often go through the very same struggles we do but we’re afraid to admit failure or “weakness”. We’re all human so reach out. You may help a friend and find strength in them as well. This will keep you from getting crazy thoughts.
Financial strife is easily the biggest thing that holds us back. When your credit score goes down, relationships seem to go down the drain too. Be wary of that. Remember that, these days, 1 in 5 Americans has serious debt or credit issues. That’s not an official stat but it’s been confirmed with even my most successful colleagues.
I know many folks say “don’t buy it if you can’t afford to pay for it in full in a month” but I’ve learned that creditors want you to roll those balances. They make their money mainly on interest, though fees (annual fees, credit limit increase fees, overdraft charges, and the like) help them out too. Rolling a balance for 90 days minimum, so long as you make payments, also helps build credit more than what I used to do before: pay my cards off before they bill event came in.
The sad part is that the credit system her in the states is dreadfully broken. The large corporations want us to be in debt and buy, buy, buy… They just don’t want us to stop paying back our debts. It can become a vicious cycle so find the balance that works for you.
It goes without saying that making minimum payments will make debt repayment take forever, unless you’re fortunate enough to have an interest-free fixed payment plan set up. Look very closely at the fine print and agreements you sign (or have already signed). Try to stick to the folks that are giving you real value and peace of mind.. Get rid of the other junk.
I would say never go with the over-draft protection option. I rather have a purchase denied than get stuck with an over-draft fee. They can add up and few creditors and banks waive these fees unless you beg and plead. Who has time for that? I remember once having $500 or so in overdraft fees just because some merchants submitted my payments weeks later. So that means you should also be careful about what you charge.
I’ve seen many credit cards offering the insurance option whereas any life events that prevent you from making payments can get you to defer your balance two to three months, sometimes more. I’d say it’s a good option and it’s only pennies for every $100 charged on your cards, typically.
Clearly, I can go on and on about this topic but I hope you found something that spoke to you personally here. I welcome you to reply to my comment if you have specific questions. Really, I should make this into an article on it’s own (sorry Phil). *wink*
Thanks for having me today!